409As are usually conducted annually or soon after a significant event – like a financing – where the valuation of the company may have materially changed. This value is then used as the strike price for future option grants. Once a service provider leaves a company, typically any stock options not exercised within 60-90 days of their departure will be forfeited and returned to the Stock Option Pool, making them available to be granted to another service provider.Ĥ09A Valuation / Strike Price – So that an employee does not have taxable income related to a stock option grant, companies periodically conduct 409A valuations – where a third party calculates the fair market value of the company’s Common Stock. The shareholders and/or BoD can then expand the Stock Option Pool as needed – often in conjunction with a financing round. Therefore, shareholders and/or the BoD must ensure enough common securities have been authorized to cover each stock option issued and approve the ESOP – which authorizes a certain number of stock options to be granted – also known as the Stock Option Pool. Stock Option Pool – A company should not grant options for which common stock has not already been authorized. Stock Options & Your Board of DirectorsĪs part of its governance responsibilities, a company’s shareholders and Board of Directors (BoD) oversee the authorizing and granting of stock options by approving the following:Įmployee Stock Option Plan (ESOP) – This legal document enables the issuance of stock options to a company’s service providers (employees, advisors, board members, contractors, etc.) – setting forth the amount of options authorized for issuance and describing how these options will be structured – including features like vesting, exercise period, etc. Here, we will be focusing on communications with your Board of Directors. They require solid documentation, an attention to detail, and clear communications with employees, shareholders, and the Board of Directors. The mechanics of managing stock option plans can often be tricky. For some roles – especially executives – stock options also help compensate for the fact that a start-up often cannot match salaries of larger companies and may also be a riskier career / financial choice. Stock options enable employees to have a stake in the company and incentivize them to work towards the common goal of generating shareholder returns – either by going public or being acquired. At S3 Ventures, we generally recommend that most, if not all, full-time employees in our portfolio – from CEOs to individual contributors – receive stock options as part of their compensation packages.
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